Guy Moszkowski, an analyst at Merrill Lynch, has downgraded three investment banks due to a deterioration in customer risk appetites across markets putting pressure on profitability.

He said in a report: “Seasonally, quarter one is generally the best of the year, and it appears the industry is exiting the first quarter on a downtrend, with pressure on the mortgage market now being exacerbated by deteriorating risk appetites elsewhere – in emerging markets, but also possibly in US corporate high yield and investment grade.”

Moszkowski remained “highly optimistic” on long-term growth prospects for the group as a whole. He said Goldman Sachs was best positioned as it had less exposure to mortgages and more to commodities.

Merrill said it was not expecting positive year-on-year growth from last year. The report said: “We think the 2006 [comparable figures] now look harder to overcome than they did even a couple of weeks ago.”

Yesterday the Dow Jones/Wilshire 5000 stock market index fell 3.2% as the total US market cap loss was about $600bn (€454m) according to Citigroup. In percentage terms the one-day decline was the worst since March 2003 - although even after the drop the index has gained 8.4% over the past year.

Tobias Levkovich, chief US strategist at Citigroup, said the market sell-off was driven by various indicators that should calm down in the future such as the VIX, the volatility index, a plunge in bullishness readings, and a rise in put/call ratios.

Levkovich said in a report: “Declines of greater than 3% in a day have generated an impressive record of market recovery with a near 80% investment success rate within three months.”